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They are not subject to lock-in periods and are easily interchangeable with securities. GDRs, on the other hand, are very simple. But this requires converting bonds into equity only after the stock hits the conversion rate which again limits liquidity of the investor. Then there is the option of issuing Foreign Currency Convertible Bonds or FCCBs. This is, however, possible when the company itself is registered overseas and listed on their exchange.
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One is through FPOs (Follow on Public Offers) aka secondary offerings. There are a couple of other ways in which Indian companies can fundraise from offshore locations. They are also usually denominated in Dollars or Euros - both very strong currencies to hold investments in. They bring more liquidity (plus diversification) to an investor's portfolio. If a company offers investment in another jurisdiction then it gains more attention and coverage in those markets.įor investors: These receipts, due to their interconvertibility with equity shares, are as good as equity shares. Companies can expand their capital and shareholder bases in foreign markets with great ease. Going forward, if the proceeds aren't substantial and the company defaults on its loans, the bank could seize the existing proceeds which in turn could impact the liquidity of investors.įor companies: They provide simplified access to investments in foreign countries. So, the amount raised via GDRs gets offset entirely or in part to repay the debts of the company. In some instances, the company uses its GDR proceeds as collateral to borrow from the same bank. Bank) which has directly bought the shares. Those rights are retained by the intermediary (i.e. The shares and dividend prices are denominated in foreign currencies so any fluctuation can impact the value of returns.Īnd most often, they don't entail voting rights for the foreign shareholders. They also come with risks like forex rate volatility. They are not backed by any asset except for the value of shares held in the receipts. Usually, most companies from India follow the GDR route due to the more stringent accounting norms, disclosures and other regulatory requirements involved in the US law-compliant ADRs.īut, GDRs are unsecured securities. They are used by foreign companies to raise capital in India. IDRs, however, run reverse to either of the above. GDRs are used for the same purpose in all foreign countries apart from the US. GDRs thus provide a simplified mechanism for buying and trading shares of foreign companies.ĪDRs are used by Indian companies to raise funds in the US and they are denominated in US Dollars. So, the bank is essentially a financial intermediary which acts as the custodian of shares issued by the Indian company. This means they trade like domestic shares in that country (even though they belong to a foreign company) and investors can purchase them in an international marketplace. These receipts are then listed as shares by the bank in its domestic stock exchange from where the investors can buy and trade. The company issues shares to the bank and the bank issues receipts or certificates or instruments known as Depository Receipts (DRs). You approach a "depository bank" which is based overseas. How would you sell your equity shares directly to overseas investors? Say, you are an Indian company that wants to raise capital from outside India. To put it simply, a GDR is a bank certificate issued in one country for shares in another country. But first, here's a run-through on how GDRs work. Turns out that the Sujana Group followed Panchariya's script to a T while issuing GDRs and defrauded the markets. In 2017, the regulator passed six orders penalising various entities involved, most prominent among whom was Arun Panchariya, the founder of Pan Asia (a merchant banking firm), who was at the centre of the scam. The SEBI has been probing and penalising GDR frauds for quite some time. It involves the manipulation of Global Depository Receipts (GDR) issues. Yesterday, the Economic Times reported on yet another scam that the Sujana Group seems to be caught in. The group and all its associated companies have a combined debt of ₹7,500cr ($1bn) and are currently being investigated by multiple enforcement agencies. Hyderabad-based Sujana Group, owned by the industrialist and Rajya Sabha MP Sujana Chowdary, has been a chronic defaulter of bank loans for the last few years. Another loan defaulter facing the regulatory scanner.